F U TU RE R E LA TI ON S B ET WE EN K U WA IT P E TR OL EU M C O RP OR AT IO N A ND T HE I N TE RN AT IO NA L O I L C O M P AN IE S : S U C C E S S O R F A I L U R E ? Master of Arts in Law and Diplomacy Thesis Submitted by Arwa Mohammad Abulhasan May 2004 Under the advisement of Professor Bruce Everett © 2004 Arwa Mohammad Abulhasan http://fletcher.tufts.edu Future Relations between Kuwait Petroleum Corporation and the International Oil Companies: Success or Failure? Arwa Mohammad Abulhasan Candidate for Master of Arts in Law and Diplomacy 2004 Presented to the Fletcher School of Law and Diplomacy Advised by Professor Bruce Everett Acknowledgements First and foremost, I would like to thank Professor Bruce Everett for introducing me to the fascinating study of petroleum, and for being a dedicated mentor. For giving me invaluable information: Shamael Al Sharikh Nawaf Al Sabah Abdulaziz Al Attar Suzanne Maloney Scott Ingersoll For helping me with translation: Bader Al Saif Obaida El-Dandarawy For being my steadfast writing tutor: Rebecca Kinyon Last, but certainly not least, I would like to thank my mother, my brother, and Obaida El- Dandarawy for their inspiration and encouragement. 2 Table of Contents EXECUTIVE SUMMARY.................................................................................................................................................4 INTRODUCTION ...............................................................................................................................................................5 ORIGINS OF KUWAITI STATEHOOD ...................................................................................................................................5 HISTORY OF RELATIONSHIP ..............................................................................................................................................7 Shifting terms ...............................................................................................................................................................8 Change in Kuwait’s leadership.................................................................................................................................10 OPEC: a community of nations.................................................................................................................................11 The era of the National Assembly .............................................................................................................................12 Final steps of nationalization....................................................................................................................................14 THE KUWAITI OIL INDUSTRY: ........................................................................................................................................15 Oil fields.....................................................................................................................................................................15 KPC and its subsidiaries ...........................................................................................................................................17 The Kuwaiti Parliament ............................................................................................................................................18 KUWAIT’S STRATEGIC INTEREST....................................................................................................................................19 CURRENT RELATIONSHIP: “PROJECT KUWAIT”..............................................................................................................26 KPC’S INTERESTS AND POSITIONS .................................................................................................................................30 KUWAITI PARLIAMENT’S POSITION................................................................................................................................32 BUSINESS MODEL OF IOCS.............................................................................................................................................34 ExxonMobil................................................................................................................................................................35 Upstream....................................................................................................................................................................36 Downstream ...............................................................................................................................................................37 IOCS INTERESTS AND POSITIONS ...................................................................................................................................37 OTHER COUNTRIES’ ARRANGEMENTS WITH IOCS ........................................................................................39 STATOIL OF NORWAY .....................................................................................................................................................40 QATAR PETROLEUM (QP) ...............................................................................................................................................43 ABU DHABI NATIONAL OIL COMPANY (ADNOC) ........................................................................................................45 ANALYSES ........................................................................................................................................................................46 THE SPECIFICS OF THE AGREEMENT...............................................................................................................................49 Contractual agreements ............................................................................................................................................50 Agents.........................................................................................................................................................................51 Enabling law..............................................................................................................................................................51 CONCLUSION ..................................................................................................................................................................53 APPENDIX 1: ....................................................................................................................................................................53 BIBLIOGRAPHY..............................................................................................................................................................65 3 Executive Summary The global petroleum industry today is dominated by National Oil Companies (NOC’s) and International Oil Companies (IOCs). The NOC’s own 90 percent of worldwide petroleum reserves while the IOCs help in the exploration, production, refining, and marketing of that petroleum. In Kuwait, the IOCs have not been involved in the oil industry for the past 25 years. However, the implementation of “Project Kuwait” may offer an opportunity for IOCs to participate in increasing oil production. This study looks at the history of the relationship between Kuwait and the IOCs, the structure of Kuwait’s petroleum industry, and the possibility of involving the IOCs in developing Kuwaiti petroleum. The constitutional clauses that regulate the use of Kuwait’s natural resources will be looked at along with the interests and positions of the Kuwaiti Parliament, Kuwait Petroleum Corporation (KPC), and the IOCs. Analysis of cooperative arrangements in Norway, Qatar, and Abu Dhabi will demonstrate the different options in involving IOCs in a national oil industry. Finally, this study will lay out the two different options for Kuwait: 1. Finalizing the Operating Service Agreements with the IOCs to start joint operations. 2. Breakdown of talks between KPC and the IOCs due to lack of parliamentary agreement. The pros and cons of each option will be analyzed and the first option will be recommended. Cooperation between KPC and the IOCs will improve the productivity, efficiency, and technical expertise of KPC while allowing the IOCs to invest in a stable, productive, and low risk operation. 4 Introduction Around the world, the relationship between International Oil Companies (IOCs) and oil producing countries ranges from animosity to cooperation; the relationship with Kuwait lies somewhere between these two extremes. Currently, the Kuwait Petroleum Corporation (KPC) is looking towards cooperation with the IOCs, while the Kuwaiti Parliament is wary of allowing IOC participation in Kuwait’s only industry. Is there any room for agreement in this economic venture that involves Kuwait’s national wealth and sovereignty, and if so, what type of agreement will emerge with the IOCs, KPC, and the Kuwaiti Parliament as players? This thesis will outline the historical relationship between Kuwait and the IOCs and will explore the positions and interests of the IOCs, KPC, and the Kuwaiti Parliament. It will then look at the arrangements that Norway, Abu Dhabi and Qatar have with the IOCs as possible templates for Kuwait. Finally, it will conclude with possible solutions that would meet the needs of the IOCs and KPC with the blessing of Parliament. Origins of Kuwaiti Statehood Kuwait was inhabited in the